Confusion Over Monetary Policy

It’s always been my understanding that left-of-centre economists, on the whole, like it when real interest rates are low (but not negative).  Among other things, this encourages more companies to borrow (and hire more workers), reduces unemployment, reduces debt-servicing costs for government, and increases the power of labour.

In July of this year, I blogged over my concern that “important voices among Canada’s left are reluctant to stress the importance of maintaining (after a recession) very low real interest rates over the long term.”

More recently, I’m both concerned and puzzled to see a progressive economist implicitly argue in favour of raising interest rates in Canada.  In his column in today’s Toronto Star, Tom Walkom writes:

Record low Canadian interest rates — another offshoot of U.S. attempts to devalue its currency — penalize those trying to live on their savings and, at the same time, encourage housing prices to career out of control.

Tom stops short of overtly advocating in favour of higher interest rates, and the entire column is certainly worth the read.  But his negative spin on low interest rates takes me very much by surprise.


  • Palley has made similar comments.

    We need low interest rates now but there are real issues – cheap loans fuel the rise of speculation and potentially household debt as we have seen in Canada of late; and pension funds are in deep doo doo with ultra low interest rates. We need a recovery first, and then a return to close to normal interest rates.

  • Tom’s concerns about low interest rates harming the standard of living of those who live off the interest on their savings show how very far he is from a Marxian analysis of class and the rate of profit. Good for Tom.

    Low interest rates hurt lenders and help borrowers. For every $1 borrowed there’s $1 lent.

    But yes, right now higher interest rates are not what is needed.

  • It was Keynes, the good liberal, who wanted to “extinguish” the rentier class. It is interesting to speculate on what Marx would of thought of a world using fiat money (not convertible into gold).
    Starting with the world as we find it, the best interest rate policy is stability of interest rates. The first problem is that interest rates influence exchange rates, and interest rate differentials accelerate flows of hot money, so interest rates cannot be set (or maintained once set) without reference to world rates which in Canada means mostly U.S. rates. Keeping the Canadian dollar within a narrow band of the U.S. dollar was once a solid policy position. It was done by tracking U.S. interest rate. The second problem is where to set the central bank rate, which influences the term structure of interest rates, if you do not want to follow U.S. rates.
    In France they have a home ownership savings plan. You can lend to it, or borrow from it. The spread is about 200 basis points. You borrow at just over 4% and get something more than 2% when you pay in. It is guaranteed by the government, and widely available from financial institutions as I understand it. Since a very large percentage of bank lending is mortgage lending it makes sense to plan the process, not rely on bank rate changes to work their way through the oligopoly lending/deposit system.
    In the aftermath of the 1979 run-up of world rates, those with five year fixed rate mortgages were O.K. In places hard hit by interest rates costs and what they did to local industry (like the oil patch) those with one year mortgages often walked away from their houses. Interest rates had doubled.
    House price vary inversely with interest rates over time. People calculate the monthly payments they can afford. When interest rates fall by half, monthly interest costs do as well. So prices tend to move up rapidly when rates come down. The process is not symmetrical however, prices do not come down in the same way. The market tends to stagnate instead.
    Karl Polanyi talked about the fictitious commodities: land, labour and capital. So for all the inputs in the neo-classical production function the market cannot operate as it would if these were carrots, potatoes, and onions instead. In other words market mechanisms do not allocate land, labour, and (money) capital the way the textbook supply and demand model (for anything) suggests should be the case. For instance, trying to regulate the demand for money (and the rate of inflation) through manipulation of interest rates does make as much sense as the Bank of Canada thinks it does. Canada has a great many capital costs imbedded in the economy that are affected over time when interest rate hikes take place. In 19th century England, raise bank rate, and with the warehouses full of commodities financed by borrowing, prices fell. Such adjustments work a lot differently when you are financing pipelines or tar sands extraction, or roads, hospitals, and University buildings on budgets with slim margins.
    Until the late 1960s I believe, we had a maximum interest rate of six percent, a legislated ceiling. The bank lobby killed it. Competition was supposed to lower rates. A decade later they reached the 20 percent range for mortgages.
    Money will not manage itself said Walter Bagehot the 19th century editor of The Economist and author of Lombard St. still a great intro to banking and finance.

  • Nick me thinks you protest too much,

    “Tom’s concerns about low interest rates harming the standard of living of those who live off the interest on their savings show how very far he is from a Marxian analysis of class and the rate of profit. Good for Tom.”

    With all do respect what the fuck do you take to be the Marxian position on this? And really that is as polite as I can be.

    Stop flag waving and say what you mean.

  • Travis, when you go to the circus, you are not supposed to get upset at the clowns, just laugh and don’t sweat it. I think they enjoy their numeracy of ignorance.

    I wonder if they do know straight lines are pretty much a natural phenomenon. hmmmm, I still believe until Nick and that crew start thinking non linearly we will never have much to say that makes sense to them.

    Maybe if you type slower it might get through.

  • Hi Travis. I wasn’t protesting at all.

    I thought it was obvious what I meant. In a Marxian class analysis, there are two main classes: those who live off wages; and those who live off interest (profit). The division between those two main classes matches the division of national income into wages and profit. And the rate of profit is derived from the rate of surplus value, or exploitation. Those who live off interest are exploiting those who live off wages.

    And Tom is saying something very different from that.

  • Nick in the Marxian analysis profit and interest are separate concepts. Profit comes from surplus value; interest accrues to money capitalists who are active in financing purchases and providing means of payments. In disturbed times interest rates fall, they rise in expansionary periods. Money and industrial capitalists fight it out over the cost of borrowing and lending. Regulation is important as is the demand and supply for money. Marx was very critical of the 1844 Bank Act because it obliged the Bank of England to keep a fixed ratio of gold to bank notes.
    Interesting parallels have been drawn between Marx and Keynes as monetary economists back when people took an interest in these things. For instance:
    Keynes and Marx on the Theory of Capital Accumulation, Money and Interest Author(s): Fan-Hung Source: The Review of Economic Studies, Vol. 7, No. 1 (Oct., 1939), pp. 28-41.

  • Nick wrote:

    “Those who live off interest are exploiting those who live off wages.”

    Yes and how does it flow from this correct observation that “Tom’s concerns about low interest rates harming the standard of living of those who live off the interest on their savings show how very far he is from a Marxian analysis of class and the rate of profit.”?

    That is to say, Tom could generally see things from “Marxian analysis of class and the rate of profit (sic)” and still remark that low interest rates will, given the nature of our retirement system, hurt retired workers. So no it is not really clear what you were trying to say.

    Having pensions paid out of income flows (interest) generated off a stock of differed wages is just another example of how workers are in the final analysis responsible for their own exploitation. That is what I took away from the first three volumes anyway.

    As an aside, Marx and marxists distinguish in a rather Gothic manner between living and dead labour. Perhaps we should add to that “near dead labour”.

    In any event I am not to worried about it. Maybe you could spend some time educating your fellow boomers to vote for parties that will spend what it takes to get the economy back to full employment and thus an increased interest rate regime. I would do it but I just do not have the same credibility.

  • it is kind of interesting where I would put retired workers. Much of their know how, and contributions have been sunk into the production process and therefore from my interpretation should be classed as dead labour. The retirement as Travis and Duncan point out, come about in a deferred wage. So from a societal point of view I am not sure the manner in which retirement income is to be maintained and generated should be linked to the worker.

    The worker is indeed dead labour, but the fact that they are owed a retirement was a contractual arrangement when they existed as living labour. So in actual fact before doing an accounting of the surplus and profits to be paid to the owners of the capital in question, these wages should at point of production must be accounted for. I do think it is rather unfair to put retirees into the same boat at, lenders, speculators and manipulators of markets and money.

    The living labour’s wage should be accounted for, and not at some future point. It is by only how we have let the culture redefine and repackage pay. And sadly to see companies, especially over the past several years be mismanaged and take pensioners owed wages into the bankruptcy proceedings to be held hostage to such courts of ridiculousness, as a means to seek competitiveness, again shows the exploitation of the system, (and hear this Nick, in a class based fashion) against workers.

    In the end the whole discussion above should not be relevant, yet sadly we have let the living standards that many pensions support be subjected to such speculative and market based forces. In another world, the capitalists would do a proper accounting before splitting off their surplus.


  • i should clarify that living labour is those who do the work,

    dead labour- is mainly the capital with the accumulated living labour’s knowledge and process congealed into the production process. I typically make distintion between two types of dead labour- the inputs used in the production process, as either intermediate or raw material. I also like to use a second type of dead labour, meaning the know how and knowledge that has been transformed into the machinery and production process from past workers. A production process is never frozen, and in many cases it is improved upon by the living labour’s experience and offline input. Especially during these days of “automation” as we move towards the smart machine, it is no longer a matter of standardized tasks and processes that a worker must make. It is substantially more of an interaction between the worker and the machine, and one of the outcomes of this interaction is the machine learning from the worker on how to improve the process. (I know I am getting a little ahead, but I do not get many chances to air these theories)

    Therefore dead labour becomes a much larger factor in the production process of now and in the future. (although I may just be not thinking relatively enough)
    (this assumes that we reach further into the age of the smart machine) and we are getting there, whether it is service or goods, slowly the information age is enabling the dead labour to become life ways that will come to define the production. As workers we are already sitting on the shoulders of dead giants, but soon a new congealling will take place.

    And given that, potentially we need to rethink pensions- it is not for work past completed, it is for work still being done. For example many of my programs are still alive and well at Statcan, and I am sure improved upon. But fundamentally these algorithms are still at the heart of the living organization, so why should a future pension of mine be viewed exclusively as past wages.

    Just some random thoughts on pensions.

  • Paul wrote,

    “I do think it is rather unfair to put retirees into the same boat at, lenders, speculators and manipulators of markets and money.”

    This makes me nearly as grumpy as Nick’s original comment. In fact it was you (or a class of you) he was targeting with his silliness me thinks.

    Putting matters rather bluntly: Workers are responsible for their own collective subordination and their own collective emancipation. Almost everything the working class ever gained was by a recognition of this fact and collective struggle to overcome, in part, this fact.

    Political economy is not a morality play. Fair is as fair does. Liberty is liberty it is not a free lunch or a warm heart to paraphrase Irving Berlin that great scoundrel.

    Workers who put their differed wages into the market are just laying a claim to the surplus generated by the next generation of workers. Politically it is disastrous. We have near retirement age workers and retired workers waking up every morning to see if the markets are doing a good job at squeezing workers because their retirement depends on it. In the alternate universe I live in I think that is fucked up.

    From a real politic bargaining point of view it makes sense why the capitalist class is laughing all the way to their bank which now has an explicit guarantee of a workers bail-out. What with subordinate classes first demanding an allowance in their old age and then squealing oh please daddy do not take my allowance away how could the ruling class possibly take their inferiors seriously in such a context? Christ I am lucky I had to endure English public school because it taught me how to deal with prefects. Hint: it is not by buying insurance.

    Nick in fact did a great services in poking that monster with a sharp stick I apologize for my initial intemperance.

    Ps. Sorry Paul like I said I am grumpy. And it has been that way ever since I got exiled to Siberia.

  • Travis,

    In some circumstances, I am the first to say workers are their own worst enemy, like putting deferred wages into the market.

    My point is, given the fact that, in many cases they do not have alternatives. However, if they do have a fairly decent retirement and chose to stow it away in risky markets and what have you, then my comment you highlight is not applicable. In fact some pension funds as we have witnessed are just as bad as any speculative initiative without regard to outcomes.

    There are alternatives, which get back to the original question about interest rates.

  • I’m not used to this blog thing, but Nick Falvo has suggested I comment (on his comment on my column), so here goes.
    (1) Monetary policy alone can’t deal with a serious slump. It was Keynes, I think, who compared it to pushing on a string and he was right. The problem with the Fed’s monetary policy is that it’s unsupported by expansionary fiscal policy. Bernanke himself has made that point.
    (2) The rentier class has changed somewhat since the 1840s, or even the 1900s. These days, it’s not the landed gentry living off their Consols, but pensioners unlucky enough to have their savings in GICs or CSBs. Loose monetary policy encourages the stock market (which benefits those who appropriate profits — including some retired workers). It does not benefit those living on interest. As Duncan Cameron notes above (or at least I think it was Duncan), interest and profits are conceptually different.
    3)As someone who progressive economists don’t usually like once said: There’s no such thing as a free lunch. Or, to put it another way, the world is a complicated place. The Fed’s QE — while better than nothing for the US — is having real, and in some senses, unintended consequences on the world’s foreign exchange system. I don’t pretend to know where it will end up, but, as a student of history, I do recall that the costs of adjusting the international monetary system tend to borne by those on the periphery (see eg the interwar gold standard).
    4) It’s not all IS and LM curves. Keynes spent much of his time in the ’30s fretting about the foreign exchange markets– and even inflation. See “the world is a complicated place” above.
    5) I’m not sure how any of this fits in with Marx’s theory of class. But then I’m not sure that Marx ever fully figured out his theory of class. As readers of Capital know, his discussion on class ends abruptly after a page and a half with the cryptic note (presumably written by Engels) that “Here the manuscript breaks off.”

  • Re interest rates:

    A change in the Bank of Canada overnight rate has contradictory effects.

    An increase tends to increase the value of the Can$. This is offset if commodity prices, oil in particular, are dropping. An increase in the dollar tends to decrease exports and increase imports, which reduces jobs in Canada and reduces aggregate demand.

    When the rate on newly issued Government of Canada securities increases net new financial assets are injected into the economy, providing income for people. This increases aggregate demand.

    An increase in interest rates reduces bond prices and other asset prices and so reduces aggregate demand a little due to the wealth effect.

    Higher interest rates increases the cost of borrowing for households and businesses and tends to lower spending by both, and therefore lowers aggregate demand.

    In the current situation of depressed aggregate demand this last effect is not significant. Businesses are failing to invest not because interest rates are too high now but because they see few prospects for selling additional output. In addition many people are failing to spend, not because borrowing costs are too high but because many are unemployed. Those who are employed are tending to spend less than usual because their future is uncertain.

    Under current circumstances the net effect of a change of the overnight rate on aggregate demand is unclear.

    However a decrease definitely reduces interest income, in particular for retirees, as Thomas Walkom points out. If the overnight rate is very low then additional income should be provided to retirees to offset their loss. A fair way would be to increase OAS.

  • “An increase in the dollar tends to decrease exports and increase imports, which reduces jobs in Canada and reduces aggregate demand.”

    I know this is how we usually talk, but I do wonder about it. I mean, this is true if we ignore the internal economy. So often, we talk as if trade were all there is, but in fact I don’t think the kinds of things we import are for the most part the same as the kinds of things we export. Importing clothes is not going to change the export of oil or lumber. In reality it seems more likely that increased imports will primarily decrease local manufacture of goods, leaving exports relatively untouched especially with respect to things like oil for which demand is fairly inelastic. Of course this will still reduce jobs in Canada and aggregate demand.

  • “Businesses are failing to invest not because interest rates are too high now but because they see few prospects for selling additional output.”

    “In addition many people are failing to spend, not because borrowing costs are too high but because many are unemployed. Those who are employed are tending to spend less than usual because their future is uncertain.”

    These two statements, as we all know are at the center of what is wrong.

    So why is it we cannot come to the agreement that monetary policy, ie, interest rates and QE2 are not going to do much in terms of influencing either Business or consumers.

    We need business to invest- consumers to consume.

    Business need profits- workers need quality jobs and increasing income- under a growth based recovery.

    Increasing productivity is what traditionally has helped the profits margins. However, these are much different times, we have got to admit that nearly 40% of profits over the last few years have been generated by financial activities and fiction, and for the most part, it seemingly is occurring again. The markets are back to where they were, commodities are again moving up and down, but mostly up, like a bubble.

    We have new problems though that many believe will not allow the extremes from a bubble economy to continue. Housing crisis in many parts of the advanced economies, from Dubai to New York- over value and still toxic sitting on a balance sheet somewhere. We have fundamental global exchange rate roadblocks that are continuing to become increasingly unbalanced. Sovereign debt problems building from trying to keep banks and the finance sector and the shadow banking system from totally imploding. We have very destructive levels of unemployment in many countries, with a worsening quality of employment, and more long term unemployment. We have poverty amongst many developing nations growing rather than retreating, and lastly we have an environmental crisis that must be soon be accommodated- but it still fights the legitimacy fight with little global action- which must be the locus of change.

    So lets start by at least screaming at the economic leaders, that tinkering with interest rates and QE, will not address hardly a one on that list. We need to start building the case for new ideas and new policy action.

    We need to start to at least come up with more alternatives than fiscal stimulus. We need to work upon a blue print, and quality jobs have to be the center piece. So my rant is about a collective direction, alternative to austerity and racing to the bottom.

    We have, I predict, about 6 months, and if the current austerity plans continue and the global exchange rates are not addressed, then we will be double dipping and there will be no stopping it. In fact it already may be too late to change course, given the political mash ups we have been witnessing and the turn to the right.

    MAybe democracy does not work- about the only country I see winning through all this, if they can get their pollution under control is China. They have been industrializing, and raising their standard of living for 10 plus years, they have quite a ways to go yet, and they will continue, as no political party will pull the wool over the masses eyes like say a tea party or a wealth protector party like the republicans do. Weird, a communist regime with a fledgling capitalist looking economic system actually makes it way past a democracy- or is that a democracy? Not so sure about that, Koch brothers and the super wealth buying up all those Tea party votes to channel working people’s dissent and frustration.

    Hmmm. Maybe the speculators will soon start thinking about producing goods again, and may actually hire a worker.

  • Re Paul Tulloch @ 7:41
    ”…We need business to invest- consumers to consume…”

    Indeed. Today we are in a demand constrained world – people aren’t spending enough to get business to invest. But business won’t invest because people aren’t spending. There are three ways out of that conundrum: 1-high income people spend more despite general economic conditions (e.g. bribe them through another much bigger home renovation tax credit) 2-government spends more or 3-exports increase. That’s all there is.

    I opt for 2. There are tons of things we need: a better rail system, public transit, low income housing, public pharmacare, childcare, etc.

    The exports (option 3) we are likely to wind up with are greater commodity exports – oil in particular – which will skew our industrial structure to over-reliance on one limited sector, subject to volatility of commodity prices and the whims of foreign buyers.

    ”…We need to start to at least come up with more alternatives than fiscal stimulus…”

    We need all kinds of alternatives: shorter working time, green energy, less pollution, etc. Right now however we are stuck in a world of insufficient demand yet all kinds of immediate alternatives and unmet needs are available to boost it – see my previous paragraph re option 2. These things can be done starting immediately. A political decision has been made not to do so.

  • Re Paul Tulloch at 7:41

    ”…So why is it we cannot come to the agreement that monetary policy, ie, interest rates and QE2 are not going to do much in terms of influencing either Business or consumers….”

    Canada did not do QE except for a one year period (?something like that) during which the Bank of Canada set excess settlement balances at $3 billion. That was reduced to $25 million in June of this year.

  • Here’s a very simple and very crude model.

    There are two classes: workers; and retired workers.

    Workers earn wages, but some of those wages are deferred. Deferred wages are invested in either bonds or stocks. Bonds earn interest, and stocks earn profits. Firms’ revenues are used to pay wages, and any surplus value over wages is deemed to be the return to capital, and is used to pay interest on bonds plus profits on stocks.

    Retired workers live off their deferred wages, plus the surplus value in the form of accumulated interest and profit.

    The rate of surplus value determines the distribution of income between workers and retired workers (aka “capitalists”).

    A so-called “defined benefit” pension plan is a pension plan that is 100% invested in “bonds” issued by the very same company that employs the worker. (It is not at all diversified). Those “bonds” are non-marketable, are usually senior to stocks, but often junior to the other bonds. (It is not very safe).

    As I said, it’s a very crude model. But it gives a very different perspective than Marx. It’s a bit closer to Tom’s model (but not the same). According to this model, class conflict is generational conflict. That conflict would become even starker if I added an effect of high interest rates on reducing aggregate demand and increasing unemployment into the model.

    There’s more than one way for theorists to divide people into two classes with conflicting interests. Boomers, vs the rest.

  • Hi Nick,

    Yep, and IF all financial assets WERE somewhere around GINI = 0 AND WERE concentrated in the the generational cohort of say 60 and over then we could get on with generational warfare; Tom could be its patron saint; you could re-launch the marginal revolution; your profession could decry Tom as unscientific; and then I could periodically show up once and while and say that Tom might just have a point.

    I was also thinking that IF air-planes did not fly but rather traversed the earth on round pneumatic devices they might more properly be called buses. I am what the Latin might call radix that way.

    Scholastics can do whatever they want. Proper social theory is done by having the assumptions in the model at least kiss the cheek of reality (as in, irreducible decent first approximations). I realize that ever since the F-twist some academics have come to believe they are reality non-constrained.

  • Hi Travis:

    Here’s a second very simple and crude model.

    There are two classes of people. Workers earn only wages, never hold capital, and never earn any interest or profits. Capitalists hold all the capital, and never earn wages. (You can guess the rest, because it’s a familiar model).

    Both models are false. Which model is closer to the truth?

  • I got a call from Toronto saying my comment was too cryptic and too hurried. The point was simply this: Tom’s claim that, which Nick then built his model on, is false:

    “(2) The rentier class has changed somewhat since the 1840s, or even the 1900s. These days, it’s not the landed gentry living off their Consols, but pensioners unlucky enough to have their savings in GICs or CSBs. ”

    This claim is simply false as in not confirmed by the evidence. Statistics Canada actually tracks that pesky little aspect of reality sometimes referred to as wealth inequality or wealth concentration. Marc Lee did a post on this back in 2006 on this very blog. Here is the money quote:

    “In terms of distribution, the report finds a worsening situation with regard to wealth inequality. By quintiles, the largest gains in net worth accrue to the top quintile (up 43% from 1999) and things scale down from there; the bottom quintile had a 70% decline in net worth. In the supplementary tables, it is notable that there are now over one million households with over a million dollars in net worth. These households, 8.2% of families, hold 46.5% of the total net worth. Overall, the top 20% had 69.2% of total net worth, while the bottom 20% had 2.4% and the bottom 60% had 10.8%.”

    These figures include houses and pensions. So just to echo: the top 20% of families own 70% of all net worth in Canada (the US even more unequal). As an aside, if we were to link families via blood lines I bet we would find some even more illuminating facts on wealth concentration. And ditto if we put in the uncomfortable facts about RRSPs.

    Anyway people are of course free (liberty is liberty) to build any model they like, make any assumption they want; and we can engage in a kind of post modern nihilistic set of word games and call that an honest days of academic / professional work if we want I suppose.

    So Nick I will take Marx’s simple model (sic) over your model for the reasons outlined above.

  • Umm Nick, looks like Travis’ model, crude as it is, is in fact closer to the truth. Of course, this is in a way besides the point…Nick, your simplistic and reductionist treatment of Marx and Marxist political economy is unbecoming an intellectual of your stature. In fact, it is downright dishonest. Marx’s model was used to apprehend an essential aspect of capitalist production, which he saw as historically novel. As Travis has made clear, and as Marx himself outlined, this should never be taken to mean that the model is a direct correspondent to the reality it helps us apprehend, as though we can easily carve up the world into two classes and voila, an accurate historical account we have. The contradictions and accommodations and so forth that class conflict (inter- and intra-) creates can only be understood historically, not through some model.

    Of course, I’m skirting around the real issue – Marx had a reason for using his model as a kind of starting point for political economy – one that is a whole lot more theoretically and empirically defensible than the model you use (hint: it has to do with a word that starts with the letter ‘p’). So, if we take it that your crude assessment cannot be borne out by the facts, what does it really help us to understand? Also, we might wonder how it is you came to think that your mode of inquiry was legitimate, being as it bears only the mildest relationship to reality (you carve up a tiny slice and generalize from there)? If we add to this the fact that Marx and Marxists have long bemoaned the fact that capitalism kicks-up so many contradictions which make self-interest sometimes difficult to discern (see Vol. 1 Chap. 1), I’m left to wonder if you’ve ever really read Marx.

  • I perhaps should also point out that Capital is a critique of extant political economy and 19th capitalism and not a theory of the Rentier class.

    The working macro model that bubbles around in the back of my head is some variant of the Goodwin-Shaikh model.

  • Yes the second model is spot on Nick.

    Sure there are some flrill around the edges, but lets get to real point here- the population is made up of a huge proportion of the population that work for a living, and somehow get stuck when they retired, if they are lucky, (and I could pull out huge amount of poverty stats of pensioners) with some deferred wages from a lifetime of toil (unless you are a professor of course that placates themselves with notions of expertise after the entered the institution and never left once to bathe their being in a reality of social life and survival) that in many cases are reinvested to help keep their pension adequate- it is not by choice and but by the designers of pensions who just so happen in many cases to be financial types connected up to a manipulative, and in many cases a corrupt system of information access, personified as professional financial judgment and expertise (lol- and I want to be a robo signer of mortgages- I may just have enough qualifications)!?

    Then there are those few that do not work in the traditional sense, i.e. use their labour power to generate output which is defined as use value for society. And it these few that have control over a huge proportion of the economic assets. (We can get into the whole debate about the roles many executives play and determine whether any of that is actually work, buts lets just say they are rewarded a slight bit higher than a living wage)

    Exchange has no usage value- and in fact given the finacial aspects of the economy currently- actually must be considered criminal and a dis-service unless regulated a whole lot more than what we have going. And Canada may have avoided the crash for now, but lets just see how that nepotistic, free market bunch survive the coming storms. I bet we do not walk away from it with our merry looking bankers being paraded over the planet as models.

    So lets not use the blog here to poke fun at such a great intellectual as Marx. He created a something bigger than life itself, and somebody apparently who has been at least exposed to the fringe of his thoughts, would not make such shallow comments at such a mind. HE would eat you in a second- by the way -and so too would any marxist given the appropriate forum.

    Your clan sure has big balls these days- is it from the recent kicking and destruction of your neo- classical school that turned them blue?

    I am not a psychologist, but does this statement bug you- do you think about it nightly before you go to bed? I

    “we can engage in a kind of post modern nihilistic set of word games and call that an honest days of academic / professional work if we want I suppose.”

    f I spent my days and nights locked into a dead art, I would definitely have that in my head. At least Marxism is not a dead art- destroying the planet.

  • Have any of you seen data on the distribution of net worth by age? (Does StatsCan publish this data?)

    If that distribution were flat (if there were zero relationship between age and net worth) there would be zero truth in my crude and simple model.

    If my crude and simple model were 100% true (obviously it isn’t), then all the differences in net worth would be explained by age and wages. People who had recently retired and who had had the highest wages over their working lives would have the highest net worth.

  • Hi Nick,

    You wrote:

    “People who had recently retired and who had had the highest wages over their working lives would have the highest net worth.”

    Argh! So by your definition here, the C.D. Howe is just a collection of high paid working stiffs? Just another working man’s association?

    By a re-definitional waltz across your keyboard you have thrown a revolution without trying. Citizen-Worker Weston. I like it.

    His French needs some work. Does anyone know if he is getting ready for move into politics? Nick you could manage his campaign.

  • From StatsCan:


    Unfortunately, this ignores wealth in the form of employer-sponsored pension plans.


    I think one needs to specifically look at senior families if one is looking at pensions. Specifically those that are retired. Here is one just released today by the AFL showing that over half of senior families in Alberta (one of the richer provinces) have nothing but CPP.

    Senior poverty is a huge issue, and your seeming glance at the subject, and all is fine and well is rather irresponsible.

  • Paul: I was arguing in the opposite direction.

    I think low interest rates may be here for some time. Low interest rates create a problem for pensions. These problems exist now. Defined benefit pension plans have unfunded liabilities because the lower interest rates increase the present value of the future pension obligations. Defined contribution pension plans will yield lower returns and smaller pensions, unless we increase contributions. All is not “fine and well”.

    Those of us (including me) who want low interest rates (at least right now) to help the economy recover from recession need to at least recognise this problem.

    Tom’s got a point.

  • Okay lets back up here.

    I am saying senior poverty has nothing to do with interest rates, as it apparent that many seniors do not have an income stream that is attached to an interest bearing asset- mainly CPP, OAS, and GIS.

    Any hit from interest rates to pensioners are mainly those pensioners that actually have a substantive income for retirement.

    So I guess, what my point is, for those that do not have a pension, they rely on a healthy economy, so for example, they do not face social security cuts that are currently being contemplated in the US, older retirement ages, as being considered in Europe.


  • IMHO, QE2 is aimed directly at those countries that hoard USD as a means of managing exchange rates. It has nothing to to do with long term interest rates other than sending the message to the world, that the US can and will control it’s own monetary policy and if you don’t like the effect it is having the the USD then don’t collect them. I hear there is a good sale on Euros.

  • I don’t agree with Nick Falvo’s claim that a low interest rate “encourages more companies to borrow (and hire more workers), reduces unemployment, and reduces debt-servicing costs for government”.

    Employment levels are determined by aggregate demand. Given healthy AD, employment will rise to the maximum level consistent with acceptable inflation. Of course, given relatively high interest rates, less capital equipment will be employed per employee, but what of it? The idea that capital equipment per employee should be maximised willy nilly is absurd. The important question is what is the OPTIMUM amount of capital equipment per employee, a question which itself is partially determined by determining the optimum rate of interest.

    There is a significant body of opinion (to which I adhere) which claims that allowing banks to engage in fractional reserve and maturity transformation results in lower than optimum interest rates. I set out my reasons here:

    As to the idea that low interest rates minimise debt servicing costs for governments, my answer is that government debt is one big farce, i.e. such debt should be abolished. My main reason for thinking this is that since governments can produce any amount of money they want any time, it is absurd for them to borrow it.

    But for more detailed reasons, see here:

    Also, Milton Friedman advocated a “zero government debt” monetary regime here:

  • A few observations on Ralph Musgrave’s last paragraph on abolition of government debt.

    It may not be clear to some that Ralph M’s comment re bonds applies only to the federal government, the monopoly creator of Canadian dollars, not the provinces.

    It is indeed unnecessary for the federal government to issue bonds. Their purpose is to drain excess settlement balances from the interbank market. They have nothing to do with financing government activity. Indeed the bank of Canada could allow settlement balances to accumulate in the banking system (i.e. not drain them) when it deficit spends and pay interest on the excess balances if it wishes there to be a particular overnight rate above zero.

    There are a few problems though.
    1- Many people actually want the bonds to earn interest on their savings. After all government debt equals people’s savings.

    2- The banks would hate such a policy. While this alone might recommend it to many readers of this blog, it would mean substantial assets of the banks would be tied up as excess settlement balances and be unusable except to settle interbank imbalances on the overnight market. This would decrease bank profits (no doubt again appealing to blog readers!) and elicit increases to bank lending spreads and various other charges (unappealing to blog readers!).

    3- The interest on Government of Canada bonds provides net new financial assets to the Canadian economy, adding to people’s income, hence aggregate demand (AD). So eliminating the bonds would decrease AD. To compensate, government spending would need to increase to replace the missing interest payments. This would probably be a good thing since the recipients of interest from said bonds tend to be high income people who save much of their income. If the government directed the same level of spending to low income earners it could gain a considerably higher multiplier effect on AD than through the former interest payments.

  • Keith, Thanks for your thoughtful reaction to my ideas above.

    I’ll deal with the problems you raise in order, starting with your suggestion that “Many people actually want the bonds to earn interest on their savings.” I’ve found that to be a common reaction to the “no government debt” idea.

    The idea that would be savers have a right to interest earning savings, implies that others have an obligation to be in debt and pay the relevant interest. I’m not sure about that.

    This debtor and creditor situation is not symmetrical in the sense that creditors have a piece of paper called a government bond, whereas the relevant debtors are households who pay tax to fund the interest, and such households have no piece of paper that specifies how much they owe. But they are nevertheless in debt.

    If you accept the above points, that leaves the question as to how to enable would be savers to do their saving. I think that since a large proportion of saving is done with a view to funding retirement, the problem is largely solved by having people take up “pay as you go” pension schemes instead of investment based schemes.

    Now for your second problem, namely that zero government debt would reduce banks’ income and lead to their increasing their charges. My response here is very much as above, namely that I don’t think there is an obligation on tax paying households which happen not to hold government debt to subsidise banks or banks’ customers.

    Re your third problem, you solved that yourself, I think!

  • Hello Ralph,

    On your comment to point 1 that I raised:

    Isn’t your argument inconsistent with your earlier point that the federal government has no need to issue bonds since it is the monoploy creator of our currency. More specifically, Canadian taxpayers are not debtors in the normal sense of the word since federal government bonds can always be paid back with money the federal government simply creates. I would add that federal government bonds should not normally be net redeemed in any case because doing so reduces people’s wealth, something only to be done in an overheated economy.

    With respect to the other two following points I made, I agree with you. I was pointing out some of the implications. Perhaps my calling them ”problems” was inaccurate.

    With respect to other points you made, you refer to fractional reserve banking. This does not apply to Canada as the banking system is not required to hold reserves (called settlement balances in Canada). With respect to maturity transformation, are not banks obliged to ensure their liquidity lines up with the maturity of their liabilities therefore disallowing maturity transformation?

  • Keith,

    I’ll illustrate my reasons for thinking that taxpayers are debtors with a simple example. 1. Assume there is no government debt. 2. Governement then decides to fund some spending from borrowing rather than from tax. 3. That means interest rates rise and lenders abstain from current consumption so as to fund government, while the rest of the population are excused paying some tax in respect of the capital sum borrowed, but in exchange have to fund interest on the capital sum. 4. Now suppose as per your suggestion that “government bonds are paid back with money the federal government simply creates”. The process now goes into reverse. Lenders (i.e. bond holders) are repaid and will now have excess cash, which they will spend, which in turn (assuming the economy is at capacity) will cause excess demand. Government will have to rein in demand, which means less consumption by taxpayers. I.e. taxpayers will effectively have to pay back the sums that gave them the temporary standard of living boost they enjoyed under “3” above.

    Another effect, and I suspect a more important one, when government expands its borrowing and raises interest rates is that lenders don’t lend to those they would have lent to in the absence of a rate rise, and instead, lend to government. But the net effect is similar: taxpayers become the debtors instead of the above mentioned “those they wouild have lent to”.

    Now for maturity transformation and your claim that banks have to make sure their “liquidity lines up with the maturity of their liabilities”. There is some truth in your suggestion in that minimum capital requirements are imposed on banks. That is about 8% of their assets must be something a lot better than demand deposits which can disappear at a moment’s notice. See:

    But that leaves banks free to have about 92% of their liabilities made up of demand deposits, in contrast to their assets (i.e. loans) which are typically for a year or two. Plus they grant mortgages, which can be for ten years or more. I.e. they engage in plenty of maturity transformation.

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